Let’s assume (hypothetical example) that somebody ( maybe
XYZ bank) is going to offer me a loan of 50 Cr @ 15 % ., With the condition I should pay interest
per year and can repay partial amount any times and need to pay back the full
amount after 5 years. First of all I do not like to take a loan but they offer
me to think over the offer and get back
on offer within a month. I don’t like and suggest anybody to invest in the
stock market with loan amounts that too with high interest rate. But , I have come
to following option to make the most of this offer by investing in the stock
market.
1.
Investing
in Growth Stock : I should invest in high growing companies like Jubilant
Foodworks Ltd , Page Industries . But it will be too much risky to invest in these
high growing stocks , because these stocks are already trading at high
valuations . Then , future growth of these stocks depends on many variables . I
can’t predict future cash flow with these variables with my comfort level of
variance .No certainty in cash flow , So this option is not suitable for offer.
2.
Holding Companies : I have
another option to buy stock of holding companies which are trading 30% of their
holding value . I should buy majority stake in this type of company and sell
all the investment. I agree , I will not able to get majority stake at such
discount rate , then there will be some tax impact. But if I assume that if I
able to get at 50% discount and paid 30% tax then also I will able to make 66 %
money on my investment with very minimal risk .
Holding Stock value
|
Acquisition Cost
|
Profit
|
PAT
|
100
|
50
|
50
|
33
|
I can make
a cool 33 car in a few months with few assumptions, but it will be one time profit.
This is defiantly one of the better options.
3.
Golden
Eggs Stock/Company : By buying & selling holding company I can make
one time profit but what if I can get a company/stock which can lay golden eggs
regularly.
Guess which company it is ? Is it MMTC Ltd? No .
It
is Indsil Hydro Power & Manganese Ltd . Let me explain how it can lay
golden eggs. Last trading price of Indsil
Hydro Power & Manganese Ltd is 23.45 , which translates into market cap of
only 37 Cr. Now assume that I am able to get whole company or majority stake at
current price .
After getting a majority stake my first steps will be to demerge Hydro Power
Project unit in separate company from Indsil Hydro Power & Manganese Ltd. So
there will be now two companies first Indsil Hydro Ltd and second Indsil Manganese
Ltd. Indsil Hydro Ltd will have just power plant & all the cash , debt,
investment etc. will be part of Indsil Manganese Ltd.
Indsil Hydro Power & Manganese Ltd is having following
liabilities & asset on the book in last audited financial year. All values
are in crore.
Liability Side
|
|
SECURED LOANS
|
6.63
|
Buyer's Credit for raw materials
|
4.2
|
Asset Side
|
|
Equity & Debt MF , Investments
|
5.26
|
Net Current Assets(including cash 8.02 Cr.)
|
26.74
|
Closing Stock of Raw Materials
|
19.65
|
Land accumulated in the last 22 years on the book
value , current price may be 3-4 times
|
2.42
|
Building at cost (including Indsil House in posh
locality R.S.Puram, Coimbatore)
|
29.8
|
Plant & Machinery
|
46.86(Deprecated 22.14)
|
Transmission Lines
|
2.67 (Deprecated
1.86)
|
Note :- I don’t know bifurcation of assets of hydro
power project & smelter unit.
My second step will be to sell Indsil Manganese Ltd
since it is in cyclic business and I do not want to take any risk since I have
to pay loan @15 . By looking above figures of asset ,14000 M.T. INSTALLED CAPACITY of Silico
Manganese , esteem fortune 500 client list and upcoming 75,000 tonne per annum
ferro chrome smelter in Oman(25% stake). I can easily make PAT of 50 Cr by selling alone Indsil Manganese Ltd , even
considering, no power linkage will increase production cost. I am also not considering Sree
Mahalakshmi Smelter acquisition since acquisition was done in the
current year.
Let’s be conservative and assume I am able to sell Indsil
Manganese Ltd with PAT of 30 crore . So , I will return 30 crore to my lender. So,
now my loan amount will be just 7 crores .
Now I would have only one company Indsil Hydro Ltd .
But how will it lay golden eggs regularly ?
Bronze egg laid by Indsil Hydro Ltd will become
golden by REC (Renewable Energy Certificates) .
REC get traded on INDIAN ENERGY EXCHANGE .
What is REC (Renewable Energy Certificates)?
Hydro
power plant of Indsil got Registered on 16-01-2012 REC . So, it is eligible to
sell REC certificates on the exchange.
Refer
https://www.recregistryindia.in/index.php/general/publics/registered_regens
for complete registry .
What is REC rate ?
Price
band of REC for non-solar category is from 1500 to 3900 . First year Avg traded
value was 1500 but last year it has improved to 2900 .
Last month Avg value was 2402. Most of the action is
seen in near year closing period . So, price can be improved from here .
Get all the news about REC (Renewable Energy Certificates) in India at http://reconnectenergy.com/blog/category/rec-mechanism-india/renewable-portfolio-obligation-rpo/
How much it will benefit to Indsil Hydro ?
I don’t know exact PPA of company with KSEB for power . But I
have observed Avg rate of 3.33/unit in the last few years as per annual report. Apart from this power sell
revenue , now there will be additional revenue by selling REC units. This additional REC
REC
Revenue @
|
||||||||||
Power
Unit in crore
|
Power
Unit Sell rate
|
Revenue
From Power Sell
|
1500
|
REC+
Power Sell Total Revenue @1500
|
2402
|
2900
|
3900
|
|||
3
|
3.33
|
9.99
|
4.5
|
14.49
|
7.206
|
17.196
|
8.7
|
18.69
|
11.7
|
21.69
|
4.3
|
14.35
|
6.47
|
20.82
|
10.35
|
24.70
|
12.50
|
26.85
|
16.81
|
31.16
|
|
5
|
16.65
|
7.5
|
24.15
|
12.01
|
28.66
|
14.5
|
31.15
|
19.5
|
36.15
|
|
6
|
19.98
|
9
|
28.98
|
14.412
|
34.392
|
17.4
|
37.38
|
23.4
|
43.38
|
|
7
|
23.31
|
10.5
|
33.81
|
16.814
|
40.124
|
20.3
|
43.61
|
27.3
|
50.61
|
|
21 MW power plant can generate 18.4 crore units (21*1000*24*365)
in a year at 100% load factor . It can generate 7.36 crores unit at 40 % load
factor . If I am not mistaken , then the company’s highest record is around 7 crores unit
.
As per annual reports, history of power units generated in
last 6 years. You can access last 2 years annual report from BSE web site. http://www.bseindia.com/bseplus/StockReach/StockQuote/Equity/Indsil%20Hydro%20Power%20And%20Manganese%20Ltd/INDSILHYD/522165/IronSteelIntermProducts
Year
|
||||||
2006
|
2007
|
2008
|
2009
|
2010
|
2011
|
|
Unit Generated in crores
|
5.2
|
3.97
|
5.89
|
2.7
|
3.78
|
4.3
|
Case1 :
The company had generated 4.3 crore units last year
if company do the same then also it can generate revenue of 26.85 crore on last year’s Avg
REC rate.
Whatever amount of capital company has actually employed in power planct, but
for me I have employed only 7 Cr . So it becomes 300 % return my capital employed
and it is not one single year that is a golden egg laid by Indsil Hydro. It is
going to continue for many years . Only issue I will face is , I cannot re-invest
that amount @ ROCE of 300% in the company again. I will have to deploy earned
amount elsewhere, after paying the interest of around 1 crore to my lender .
The registration granted shall remain valid for a period of
five years from the date of registration certificate i.e. 15/01/2017 for Indsil
hydro. Company can apply for revalidation or extension of validity of existing
Registration at least three months in advance prior to expiry of existing
Registration. Please refer https://www.recregistryindia.in/index.php/general/publics/ProcedureRegistration
for more details.
Now consider power plant produce 4.3 crores units every year
in next 30 years and also assume REC units will be traded on avg price of 2900
for next 30 years . So our total revenue comes to 4.3*(3.33 + 2.90) = 26.79 .
Now reduce 1 crores of operation expense (very low in case of Hydro Power project), 1 crores of interest on my personal
loan and tax around 8 crores . My final profit will be 17 crores / year . Yes ,
with big assumption REC will be continue for that long period and realized rate
is 2900/unit. We are at least sure about next 5 years .Now we will calculate my wealth for next few years by investing
my profit 17 crores / year . After seeing
following figures , don’t be hesitate to call me biggest mad on the earth. It shows too much pretty picture which is unbelievable.
Wealth in crores
after following years
|
|||||||
3
|
5
|
10
|
15
|
20
|
25
|
30
|
|
9% p.a. RD
|
61.18
|
112.13
|
287.69
|
562.57
|
992.93
|
1666.74
|
2721.72
|
Got lucky , invested in MF /other investment with return
of 15% pa.
|
69.22
|
135.91
|
422.29
|
1025.75
|
2297.35
|
4976.84
|
10623.02
|
Case2 :
Now I will come from sky to ground. Current market cap of
company is 37 crores . I make deal with
promoter and followed by open offer , I managed to get this company 3 times
current market cap i.e. around 110 crores . Now I will sell smelter division
with 30 crores with all asset & liabilities. Now I will have only power
plant with zero debt . My cost is 80 cores , I will have to pay interest @15 /
year i.e. 12 crore / year . Lender was kind enough to extend loan amount.
Total Revenue
|
26.85
|
|
Interest Paid
|
12
|
14.85
|
Operational Expenses
|
1
|
13.85
|
Tax
|
4.155 |
9.695
|
PAT
|
9.695
|
My PAT / year will be 9.70 but consider it is 9 crores . I
am not lucky so will invest in recurring deposit @ 8 . What will be my wealth now
?
Wealth
in crores after following years
|
|||||||
3
|
5
|
10
|
15
|
20
|
25
|
30
|
|
8% p.a. RD
|
31.7
|
57.43
|
120
|
269.57
|
458
|
738
|
1154.05
|
Case3 :
The promoter is holding more than 53 % and government is
holding 6.64% in this counter . Promoter saw a dream . Not sure about promoter but
the analyst (even rating agencies) are coming on business news channels and
saying the Government is sleeping . 
God came into dream of the promoter
and said leave all these moh maya ( illusory world ) of metal and commodity business and create golden
laddu (egg is Non Veg, so god avoided it) for your shareholder and being yourself major shareholder
you will also get majority of golden laddus( ball) . Promoter reacted immediately
and made plans similar to mine .
Step1 :-
Sold all business of smelter unit along with Stake in other company ,MF,raw materials
, cash ,asset , liability in 30 cr PAT ( I am not a tax expert , but if company
sells these business units then tax should be less , and tax should be on
profit by selling these units) . Since, the company is going to adapt shareholder
friendly policy , So decided to pass on these profit immediately as dividend and
shareholder can reinvest that amount as per their own choices. Current effective Dividend Distribution Tax is
16.23% which translates into 4.869 on 30 crores. So , per share dividend will
be 30-4.869/1.59 = 15.80 . The shareholder will receive tax free cool dividend
of 68 % on current price around 23. So the effective invested amount becomes
7.5 / share for shareholder invested around price of 23.
Last year power plant generated 4.3 units which is also
coincidentally average of the last six years. Now consider it will be same
average in the future .
Total revenue from power plant will be 4.3(3.33+2.9) = 26.85
. There will be 1 crore operational
expenses ( hydro power plant is known for low operational expenses) . So PBT
will be 25.85. If you analyze last few years annual reports then you will
figure out tax is always less than 30 % PBT . Let’s assume it's 30 % . Tax will
be 7.75 . PAT will be 18.10 crores . Since the company is going to adapt
shareholder friendly policy , will give this amount as dividend to shareholders
. So , shareholder will receive tax free dividend of 9.53/share per year after
paying DDT. It comes to around 41 % of current price but we had received
dividend 15.80 after the sale of smelter division . So , on our effective price of 7.5 we are
receiving tax free dividend of 9.53 which translate into whopping 125 % per year and shareholder has his/her own
choice for reinvesting it.
Advantage
of applying above mentioned strategies :
1. Cost
of raw material (water) is almost zero for golden eggs , Even, Hen which used
to lay golden eggs might have been consuming high cost raw material.
2. Average
age of hydro power plant is 40-50 year . It has operational from last 12 years .
So still long life is remaining.
3. I
can go on long quarterly vacation , just need to take a weekly status report of unit generated. Complete peace of mind.
4. Most
of the revenue is going to the bottom line , the government gives some tax benefits
as well.
5. Little
or no competition.
6. Average
rainfall in Idukki district of Kerla is 3265 mm , which is 3 times the Pune district
average rainfall .So very low chances of drought.
7. 21
MW power plant can generate 18.4 crore units in a year at 100% load factor.
Some of the hydro power projects run with a load factor of 60 % . So there is scope
to increase efficiency further .
8. I
don’t know the exact detail PPA of company with KSEB . Any increase of tariff rate as per PPA, in the next few years will be surprisingly positive.
9. No
exchange rate related worries.
10. No
direct risk of what is happing in USA , Europe elsewhere in the world . Since,
I have already sold risky and cyclic business unit.
11. It
rarely matters who becomes the next PM . No issues if Narendra Modi or Rahool
Gandhi or Digvijay Singh becomes PM.
Risk :
1. Most
of SEBs are already on the verge of bankruptcy , if anything happens to KSEB and no other buyer is willing to buy .
2. Any
physical damage to power plant which is not insured .
3. Any
negative policy for REC.
I just want to elaborate how much cheaper this stock
is trading now . Nobody , is going to offer me a loan in crores.
As we know , Warren Buffet has made a lot of wealth not only
by buying stocks from the market but also majority controlling stake in the
company .
I don’t know how great investor
like Warren Buffet, Charlie Munger, Seth A. Klarman , Peter Lynch , Mohnish
Pabrai ,Rakesh Jhunjhunwala or Professor Sanjay Bakshi would have reacted to similar type of opportunity
but I, a normal value investor would have grabbed it with both hands if the
fund is available with me. Not only on current market cap of 37 crore but till 3 times
of current market cap i.e. 110 crores. 110 -30 = 80 Investment , 26.85 Avg revenue
which translates into 33% return on my investment or capital employed every
year.
Investing
in Stock of Indsil Hydro Power & Manganese Ltd :
One think is sure buying a company
and buying a stock is completely different thing , even though stock buying is considered
to be buying a portion of the business. If you are buying stock of Indsil Hydro
Power & Manganese Ltd then there are a couple of extra risks emerges as compare to buying the company.
Stock Risk :
1.
Any corporate governance issue is risk , which
is applicable to every stock.
2.
It is not possible for a company to demerge
power plant . It will increase silica manganese plant production cost. So, stock can’t
become risk free.
3.
Even though there will be predictable and stable
revenue from power division but any global issue can impact smelter division.
4.
We are not aware Sree Mahalakshmi Smelter
acquisition impact on the balance sheet.
Best time to invest in this stock would be when we see that smelter
division is expected to show a profit. Smelter division has posted around 5 crores of loss for Last 9 months.
Now calculate expected price when good times return for smelter division . I don’t know when that time
will come maybe 3 years , 5 years or next year. Nobody knows.
Due to the de - bottlenecking operation , Sree Mahalakshmi
Smelter acquisition and upcoming 75,000 tonnes per annum ferro chrome smelter
in Oman (25% stake) , I am sure in good days Smelter division will post PAT in excess
of 15-25 crores .
Expected Market Cap @
|
|||||||
Power Division PAT
|
Smelter Division PAT
|
Total PAT
|
3PE
|
4PE
|
5PE
|
6PE
|
7PE
|
20
|
10
|
30
|
90
|
120
|
150
|
180
|
210
|
20
|
20
|
40
|
120
|
160
|
200
|
240
|
280
|
20
|
25
|
45
|
135
|
180
|
225
|
270
|
315
|
I don’t know how will be price movement of this stock in
near future . There might be seller which will sell even below Rs 20 because they
are not interested in fundamental of the company or have great knowledge of commodity
pricing and expecting more & more losses for smelter division . Secondarily
, this is a small cap with inconsistent growth , so very few analysts or nobody
is going to analyze it in some depth. But one thing is sure whenever good days will return to smelter division , it will become multi bagger from current levels with
minimum risk .
.If you know any stock with golden eggs then please share with us , together we will make impact to reduce import of gold and contribute to reduce the current account deficit of India .
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